Question

In the given figure, what does the gap ‘KT’ represent? State any two fiscal measures to correct the situation.

Answer 1

KT represents Excess Demand.

The measures to control Excess Demand are:

1. By raising taxes, the government can reduce people's disposable income. As a result, private final consumption expenditure decreases depending on the Marginal Propensity to Consume, which leads to a fall in Aggregate Demand.
2. A decrease in the money supply, which means less money is available to people, reduces their purchasing power. Therefore, the demand for goods and services declines, causing Aggregate Demand to fall.